August 31 was the last day the California Legislature was in session for 2020. Although many tax bills failed to pass, SB 972 and AB 3372 did and are awaiting signature by Governor Newsom. Taxpayers also need to keep a close eye on Proposition 15, which is on the November ballot.
This bill would require the Franchise Tax Board (FTB) to annually compile a list on April 1 of all taxpayers subject to the Corporation Tax Law with gross receipts of $5 billion or more. The list would include the taxpayer’s name, tax liability, tax year of return, gross receipts and the amount and type of credits claimed. This information would be provided to certain committees of the Legislature and available to the public by May 1 of that year. The gross receipts test will be based on a combined group if a combined return is filed. If signed by the governor, the first report would be required on April 1, 2021.
This bill has two provisions. The first is regarding electronic withholding orders and the second is regarding a combined group’s water’s edge election.
Electronic withholding orders
The Wage Garnishment Law allows the FTB to issue various earnings withholding orders if there is an outstanding liability for a tax under either the Corporation Tax Law or Personal Income Tax Law. Currently these orders must be delivered in person or by mail. If signed by the governor and enacted by September 30, 2020, this bill would allow the FTB to issue the orders via electronic communications starting January 1, 2021 for orders issued after that date.
Water’s edge election
For a California taxpayer to make a water’s edge election, it must include every member of the combined group subject to California taxation. Since 2011, California’s “doing business” standard in the state has been based on certain levels of property, payroll, and sales. So, it may be possible that a foreign affiliate was excluded from the water’s edge election at the time of filing because it did not exceed the “doing business” threshold in the state but later met the threshold in subsequent years.
This raises a question regarding the validity of the water’s edge election if it is missing taxable members of the group. In response, the FTB has previously issued two notices regarding the issue (FTB Notice 2016-02 and FTB Notice 2017-04) which provide for a valid water’s edge election for the group if the only reason a foreign affiliate is taxable in California is based on the bright-line threshold (membership interest above 0.2% is qualified as actively doing business in California).
If signed by the governor, this bill would codify the FTB’s notice positions for tax years beginning on or after January 1, 2021.
The following tax bills did not pass:
2020 has been a chaotic year on many fronts. We expect that bills to increase taxes on larger taxpayers/employers will continue in the coming years in order to recoup some of the funds lost due to the COVID-19 emergency. At least one highlight of the year is that if signed, AB 3372 will provide a lot of reassurance for water’s edge taxpayers with foreign affiliates.
That being said, the next hurdle California taxpayers have to face is the ballot initiative Proposition 15 regarding a “split roll” for property taxes. Proposition 15 would assess property taxes on commercial and industrial properties whose business owners have $3 million or more in California real estate based on its market value. Residential properties and business owners with less than $3 million in California real estate would pay property taxes based on purchase price.
If implemented, this would be phased in for certain taxpayers starting in fiscal year 2022-2023. It is expected to increase state revenue by $8 billion to $12.5 billion per year.
This article was posted by our friends at Armanino, LLP. If you have any additional questions, contact the Armanino experts.
Authors:
Alex is the National Practice Leader of Armanino’s State & Local Tax (“SALT”) Practice and has over 18 years of deep technical experience in multi-state income/franchise tax, sales/use tax, local taxes, and credits and incentives. Alex has served clients across sectors including technology, retail, media and entertainment, utilities, pharmaceuticals, manufacturing, telecommunications, government contractors, e-commerce, software, construction, engineering, and financial services.
Alex’s technical expertise includes unitary and consolidated filings; mergers and acquisitions consulting and due diligence; the development, evaluation, and implementation of restructuring plans; apportionment reviews and planning; ASC 740 and ASC 740-10 reviews; audit representation; transaction analysis; residency audits; nonresident withholding; Wayfair nexus studies; and voluntary disclosure negotiations.
Alex earned his BA from Boston College and his JD from the University of Connecticut School of Law, where he served as the Administrative Editor of the Connecticut Journal of International Law. Alex is admitted to the New York State Bar, the District of Columbia Bar, the Connecticut Bar, and the United States Tax Court. Alex is a California Tax Education Council (CTEC) Registered Tax Preparer and a Registered Lobbyist with the City of Los Angeles.
Stephanie is a Senior Manager within the State and Local Tax division, where she focuses on multi-state income tax planning and compliance. While her expertise is in income and franchise taxes, she also has experience in sales and use tax, state credits and incentives, mergers and acquisitions due diligence, and state income tax refund return reviews. Her clients cover a range of industries, including technology, cryptocurrency, manufacturing, distribution, retail, healthcare, and service providers.